Banking without bonuses
Can you bear to hear any more about bankers' bonuses? Well, dig in - you ain't heard nothin' yet. There are still six weeks to go before Goldman Sachs, the infamous 'vampire squid', announces its 2009 bonus pot. Only then will the crescendo will reach its maximum. I hope the debate features more references to Svenska Handelsbanken than we have heard so far. This remarkable bank is described in A Blueprint for Better Banking by Niels Kroner, which was published last month by Harriman House. Someone should send Prince Andrew a copy.
Svenska is a universal bank. It has 700 branches and deals with companies as well as individuals. Its capital markets, asset management and treasury operations generate 20 per cent of group profits. Svenska's balance sheet totals two trillion Swedish kroner, or about £200bn, which makes it about one eighth the size of say Barclays. But, since Svenska makes better returns, its market capitalisation is a quarter of Barclays'. Here's another interesting statistic: Barclays employs 13 times as many people. These figures already hint that Svenska is a pretty special bank.
But it has two particular aspects which are real outliers in the current debate. First, Svenska was virtually unscathed by the credit crunch: in 2008, its operating profits grew by four per cent and amongst the top 26 European banks, it was one of only three which neither received government support nor raised fresh capital last year (the others were Deutsche Bank and BBVA of Spain). Secondly, the bank does not pay bonuses. Let me spell that out. It doesn't pay annual bonuses. It doesn't pay long term bonuses. It has no share options. It has no long term incentive plan. It has no share grants.
Well I confess it does pay a few bonuses at middle management level in its investment banking operations. But the policy for senior staff is laid out in Svenska's annual report: "Remuneration is paid only in the form of a fixed salary and customary benefits. Variable compensation benefits such as bonus and percentage of profits are not paid. The principle of a fixed salary without variable components or bonus is based on the idea that long-term confidence is difficult to combine with short-term rewards. This principle applies to all employees of the Bank who have the right to make decisions on credit risk, market risk, liquidity risk and matters which may entail operational risk."
Astounding! How can a sizeable bank keep senior people without paying bonuses? According to Niels Kroner, at least part of the answer is that Svenska is a stable environment where change is evolutionary and big restructurings are all but unknown. Yet it is also a growing bank, which means there is good scope for promotion: "If staff know that there is a high likelihood that the rules and the jury will change over the next five years they will demand more immediate and tangible reward than an implicit promise of future promotion?[whereas] a lack of organisational stability tends to force banks into a bonus culture."
So the bank's challenge is not finding the money but finding the employees: people who are "not geniuses perhaps, but talented and moderately ambitious people who are motivated to do what is right because it is right, not because it earns them a financial reward."
This may sound a touch sentimental, but Niels Kroner is not an obvious victim of sentiment. Born in Germany, he did an MBA at Stamford whilst working in McKinsey's Financial Institutions Group. He then worked on corporate strategy at Barclays and for a hedge fund. You might expect him to be cheerleader for investment banking rather than for a boring regional bank staffed by "moderately ambitious people".
There's a lot more to this book than Svenska's remuneration policy. It documents the bank's upside-down model of banking, featuring powerful branch managers of the kind who have simply disappeared from UK banks. Only eight per cent of the bank's loan decisions require approval from its central credit committee. The bank never trades margin for risk, nor collateral for loan servicing capacity. Kroner compares this approach with "The seven deadly sins of banking", which as he points out, are basically irresistible - especially to the immoderately ambitious.
"Is Svenska Inimitable?" asks Kroner in a closing chapter. He says not, but I disagree. Until someone gets on top of the bonus problem, banking will always attract too many immoderately ambitious people. They should all be beaten about the head with this book.
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